[Viewpoint] Korea and a new global currency

Are the days of United States supremacy ending? Many people think so. They see that U.S. hegemony is about to end and a new multipolar world is about to emerge.

A portent of such a change took place recently.

About 10 days before the G-20 summit in London, Zhou Xiaochuan, president of China’s Central Bank, posted a statement on the bank’s Web site that prompted a stir.

He argued that the U.S. dollar is no longer appropriate to perform the role of a global reserve currency. He proposed that the special drawing rights (SDRs) of the International Monetary Fund should replace the role of the greenback.

Russia and Brazil supported the argument.

It’s clear that China has a position at the table for this debate. About 70 percent of the Chinese government’s $2 trillion foreign currency reserve is held in U.S. dollars.

From such a position, China is worried that the United States will print more money in order to stimulate its economy.

If that’s done, the dollar’s value could plunge, putting a big dent in China’s enormous investment in the United States. With that in mind, it’s little wonder why China would make such a proposal.

For their own special interests, the U.S. appears not to be rushing to embrace this line of discourse. After U.S. Treasury Secretary Timothy Geithner said he would consider the option, chaos broke out. Washington quickly clarified its position, saying that China’s proposal was unrealistic.

Some have said the Chinese government has kept the yuan artificially devalued to encourage exports, incurring excessive trade surpluses that were then invested in U.S. bonds.

Therefore, they reason, China is in part responsible for the situation.

The American president, Barack Obama, also made clear his intention to resolve the global economic crisis under U.S. leadership, saying that the international community is still showing strong trust in the U.S. dollar.

In modern history, superpowers have used their own currencies as global reserve currencies. In the 19th century, Britain used its industrial clout and superior naval forces to maintain the pound as the reserve currency.

In the latter half of the 20th century, a U.S.-led global order was established and the dollar became supreme. Similarly, the U.S. buttressed its role with superior industrial technologies and military power.

The two superpowers of the 19th and 20th centuries used their currencies to play the role of the world’s central bank.

But today, the economic power of the U.S. is being shaken by the global financial crisis, and the power of the dollar is being challenged.

American economist C. Fred Bergsten has proposed that China and the U.S. form an unofficial “G-2” partnership.

It would seem that the U.S. government should share the power of its currency with China.

What is the substance of this debate over creating a new global reserve currency? At its root is that a specific nation’s domestic currency is performing the role of the global currency.

The supply of a reserve currency should be decided based on the world’s economic situation.

And yet, the supply is being decided based on a nation’s special situation and policy decisions.

For example, in the late 1960s, the United States was spending lavishly on the Vietnam War. As a result, inflation from the United States was exported around the world, and the global economy suffered. The German and Japanese governments complained bitterly.

In order to root out such unfairness, the International Monetary Fund once attempted to issue SDRs, an artificial reserve currency, to replace the U.S. dollar.

But the U.S. dollar continued to perform the role as the key currency despite the newly adopted floating exchange rate system.

There was no other currency available to perform the role of the U.S. dollar, and major economies actually preferred the U.S. dollar over SDRs.

Once again, the supremacy of the dollar is under attack. However, the dollar has not yet fallen to the level of other currencies.

Today, we are living in an era somewhere in between the hegemony or the United States and a multipolar system.

Therefore, it’s fortunate that Korea has not hurried to publicly support the arguments of either the United States or China.

Just like security diplomacy, timing is extremely crucial in currency diplomacy. Prudence is always the most important virtue.

The writer is a professor of international politics at Seoul National University.

by Yoon Young-kwan